| Using samples from 9 East Asian and 13 European countries, this study examines the impact of ultimate ownership and investor protections on dividend policies. Specifically, it measures how legal institutions (measured by law origin, anti-director rights, efficiency of judicial system, and disclosure standards) and extra-legal institutions (measured by effectiveness of competition laws, newspaper circulation, and effectiveness of tax enforcement) interact with controlling shareholders' separation of control and ownership in affecting the level of dividend payouts. Consistent with La Porta et al. (2000) and Faccio, Lang, Young (2001), legal institutions and controlling shareholders' cash flow-control divergence are positively associated with dividend payout ratios respectively. The positive relation found between controlling shareholders' cash flow-control divergence and dividends reflects controlling shareholders' attempts to mask their expropriation activities. As hypothesized, both univariate and multivariate regression results show that firms in countries with strong extra-legal investor protections tend to pay higher dividends than firms in countries with weak extra-legal investor protections. In addition, the interactions between cash flow-control divergence and legal or extra-legal institutions are found to be negatively associated with dividend payouts. These negative relations imply that controlling shareholders' needs to mask expropriations are reduced when legal or extra-legal investor protections strongly protect minority investors and reduce their alertness to controlling shareholders' extractions of private benefits. Finally, this paper provides evidences that extra-legal investor protections are at least as significant as legal investor protections in affecting controlling shareholders' behavior in masking expropriations by paying dividends. |
